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Why Is Nordstrom (JWN) Up 2.3% Since Last Earnings Report?

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A month has gone by since the last earnings report for Nordstrom (JWN - Free Report) . Shares have added about 2.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Nordstrom due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Nordstrom Reports Wider-Than-Expected Q1 Loss

Nordstrom reported first-quarter fiscal 2021 results, wherein the loss per share was wider than expected, while sales beat the Zacks Consensus Estimate. While the top and bottom lines improved on a year-over-year basis, representing a marked recovery from COVID-related restrictions compared with the prior year, the bottom line compared unfavorably on a sequential basis and from the first quarter of 2019.

Nonetheless, the company’s sales improved on a sequential basis for the third straight quarter. Moreover, it noted that sequential top-line growth trends continued to the second quarter of fiscal 2021.

Q1 Highlights

Nordstrom posted an adjusted loss of 64 cents per share, wider than the Zacks Consensus Estimate of a loss of 53 cents. However, the loss per share in the reported quarter narrowed compared with the loss of $2.23 reported in the prior-year quarter. Nonetheless, the bottom line compared adversely with earnings of 21 cents in fourth-quarter fiscal 2020 and 23 cents earned in first-quarter 2019. The soft bottom-line performance can be attributed to continued cost pressures, elevated labor and shipping costs, and apparel industry supply constraints.

Total revenues advanced 44% year over year to $3,009 million but surpassed the Zacks Consensus Estimate of $2,882 million. In first-quarter fiscal 2021, net sales increased 44.2% to $2,921 million, while Credit Card net revenues declined 5.4% to $88 million.

The better-than-expected top-line performance can be attributed to broad-based improvement across the Nordstrom and Nordstrom Rack brands, both in stores and online, driven by robust customer demand. Further, sales growth reflected overall improved trends, with growth across regions and merchandise categories. The demand recovery can be attributed to increased vaccinations, lifting of COVID-related restrictions in many markets and government stimulus payments. The company witnessed an acceleration in pent-up demand throughout the reported quarter as normal activities resumed, including social events, travel and return-to-office.

Moreover, total revenues represented a 720-bps sequential improvement from the fourth quarter of fiscal 2020. This marked the third straight quarter of sequential top-line growth, driven by gains in both Nordstrom and Nordstrom Rack brands, led by a recovery in stores sales due to the easing of COVID-related restrictions and strong digital growth. Nonetheless, the top line reflected a decline of 13% from the first quarter of fiscal 2019, reflecting a decline from the pre-pandemic revenues.

In first-quarter fiscal 2021, net sales for the Nordstrom brand advanced 36.7% year over year to $1,854 million. Sales for the Nordstrom Rack brand rose 59.5% year over year to $1,067 million. Additionally, Nordstrom sales improved 6% sequentially and Nordstrom Rack sales rose 10% sequentially. However, sales for Nordstrom and Nordstrom Rack brands reflected declines of 13% each from first-quarter fiscal 2019.

Momentum in the digital business continued to aid the top line. Notably, digital sales advanced 23% year over year and 28% from the first quarter of fiscal 2019. The digital business witnessed gains from its efforts to unleash the full potential of its digital-first program. In the fiscal first quarter, digital sales represented 46% of net sales compared with 54% in the year-ago quarter.

Nordstrom's gross profit margin expanded 2,000 bps to 31% in the reported quarter. This substantial growth was a result of lower markdowns and leverage from higher net sales volume. However, gross margin contracted 260 bps from first-quarter fiscal 2019. The decline is attributed to relatively lower sales and merchandise margins, offset by a permanent decline in buying and occupancy costs.

Ending inventory declined 2% from first-quarter fiscal 2019. The company has been balancing inventory levels with sales, while managing receipt flows to mitigate potential supply-chain disruptions as the year progresses. The inventory decline from the fiscal 2019 quarter includes a 700-bps impact from the speeding up of vendor shipments to support sales trends and mitigate supply-chain backlogs in the fiscal second quarter.

Selling, general and administrative (SG&A) expenses, as a percentage of sales, declined 1,900 bps year over year to 37% in the fiscal first quarter. The SG&A decline was mainly driven by leverage on higher sales and the continued benefit of permanently reducing overhead costs by 15%. SG&A expenses also gained from the absence of $250 million in charges associated with the impact of COVID-19 in 2020. However, SG&A expenses increased 280 bps from first-quarter fiscal 2019 due to higher COVID-related labor and freight costs.

Loss before interest and taxes of $85 million reflected a decline from a loss of $813 million in the year-ago quarter. This narrowing of loss was mainly the result of higher sales volume and lower SG&A expenses.

Other Financials

Nordstrom ended first-quarter fiscal 2021 with a strong balance sheet, with available liquidity of $977 million, including $377 million of cash and cash equivalents. Moreover, it had long-term debt (net of current liabilities) of $2,847 million and total shareholders’ equity of $166 million.

As of May 1, 2021, the company used $364 million of net cash for operating activities and spent $126 million as capital expenditure.

In April 2021, Nordstrom redeemed $600 million of 8.75% secured notes and issued lower-coupon unsecured notes due in 2024 and 2031, which further enhanced its financial position. The transactions have made the company’s bond portfolio entirely unsecured once again. Furthermore, the transactions are likely to reduce annualized interest expenses by $30 million, beginning in the second quarter of fiscal 2021.

Fiscal 2021 Outlook

While the uncertainty regarding COVID-19 lingers, the company reiterated its outlook for fiscal 2021 based on recovery in demand. It continues to anticipate total revenue growth of more than 25%, with digital representing 50% of sales. The company expects digital penetration to vary over the course of the year, driven by the pace of recovery at stores. Driven by expectations of improved gross margin and moderating of cost pressures, it expects EBIT margin to be 3% of sales for fiscal 2021. Income tax rate is expected to be 27%.

For fiscal 2021, capital expenditure is anticipated to be 3-4% of sales. It will likely support investments in technology and supply-chain capabilities. Further, the company expects leverage ratio of 3 times by the end of fiscal 2021, positioning it to return cash to shareholders by the end of the year.

For the first half of fiscal 2021, the company anticipates nearly breakeven EBIT, suggesting 45% of total fiscal 2021 sales.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted 12.41% due to these changes.

VGM Scores

Currently, Nordstrom has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Nordstrom has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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